Deductions and underpayments 





Under section 13, ERA 96, an employer is only entitled to make deductions from a worker’s pay if: 




• the employer has a statutory duty or authority to do so (for example, income tax and National Insurance); 





• one or more written terms of the employment contract, a copy of which was given to the worker before the deduction is made, allow the deduction; or 





• with the written consent of the worker, which must have been given before the incident leading to the deduction.





A signed authorisation form for union subscriptions is a written consent, making this a lawful deduction.





If pay is deducted without consent, the worker can bring a tribunal claim for unlawful deduction from wages under Part II, Employment Rights Act 1996 (ERA 96), also known as a “wage claim”. This includes shortfalls in wages and late payment. Failure to pay wages in full when due is an unlawful deduction. 





There are important exceptions to this protection. These are explained on page 108.

Where there have been successive unlawful deductions of wages, only two years of back-pay can be claimed in the tribunal, regardless of how long the employer has been continuously underpaying wages (Deduction from Wages (Limitation) Regulations 2014). The regulations do not apply to claims for statutory sick pay, statutory maternity or adoption pay or statutory guarantee pay. Only tribunal claims are caught by this two-year restriction. Six years of pay arrears can be recovered in the small claims court. These regulations do not apply in Northern Ireland.

In a claim for unlawful deduction of wages, “wages” include fees, shift allowance, bonuses, commission, holiday pay, guarantee pay, sick pay (including statutory sick pay), maternity, adoption and shared parental pay and notice pay, but only if the notice has been worked. If the employer wrongly ends the contract without notice or notice pay, unpaid notice pay must be claimed as a breach of contract, as damages for wrongful dismissal (Delaney v Staples [1992] IRLR 191). 




Unpaid expenses cannot be recovered as an unlawful deduction of wages. Instead, a contract claim must be brought (section 27(2)(b), ERA 96). 





“Wages” for this purpose do not include pension contributions by an employer to an external pension provider (Somerset County Council v Chambers [2013] UKEAT 0417/12/2504). 





Even if an employee has breached the employment contract, for example, leaving without giving full contractual notice, the employer has no automatic right to deduct pay. Any deductions without authority from a final pay packet are unlawful. For example:



Deducting money from an employee’s final pay packet because they have taken more holiday than they have built up is an unlawful deduction from wages unless a written agreement, made in advance, allows this. This agreement is usually a written term of the employment contract. 





Deductions for reasons such as dishonesty, poor work, negligent damage to property or misconduct, can also only be made with the worker’s advance written agreement. Any agreement must be specific and clear. It must spell out not just that the money is owed, but also that it can be deducted from the employee’s wages. For example: 





The law on unlawful deductions of wages (Part II, ERA 96) can be used to challenge unilateral contract changes that result in a reduction in pay. For example, in Kerr v Sweater Shop [1996] IRLR 424, the EAT ruled that a unilateral change to the calculation of holiday pay, communicated to workers by means of a general notice, did not comply with the law and the resulting pay reduction was unlawful. 



Similarly, in International Packaging Corporation v Balfour [2003] IRLR 11, a unilateral cut in working hours led to an unlawful deduction. In Bruce v Wiggins Teape [1994] IRLR 536, this law was used to reinstate an overtime rate that the employer had scrapped unilaterally. And in Saavedra v Aceground [1995] IRLR 198, it was used to reclaim a share of tips that the employer had unilaterally reduced.





Where the employment contract contains a written contract term that allows the employer to make a unilateral change to contract terms, any resulting wage cut is likely to be lawful, as long as the term is very clear and the employer does not enforce it unreasonably. For example, in Hussman Manufacturing v Weir [1998] IRLR 288, the employee’s shift changed, leading to a consequential pay cut. This was not an unlawful deduction of wages because the contract included a clear written term permitting the employer to make unilateral shift changes. The law states that a deduction from pay is allowed where it has been authorised in advance by a “relevant provision in the contract” (section 13(1)(a), ERA 96). For information on how courts and tribunals approach express terms of this type, see Chapter 3, page 77.



Sometimes a written contract term that allows the employer to make deductions from wages can be challenged as a penalty. This is the legal name for a contract term that is intended to deter or punish an employee instead of compensating the employer. Penalty clauses are unlawful and unenforceable. A clause will be a penalty if it imposes a detriment on the worker that is wholly disproportionate to any legitimate interest of the employer in having the contract performed (Cavendish Square Holding B.V. v Talal el Makdessi [2015] UKSC 67, Cleeve Link Limited v Bryla [2013] UKEAT/ 0440/12/0810). 



A contract term that is a genuine attempt to pre-estimate the loss if the employee were to break the contract is unlikely to be a penalty. An example might be a contract term that uses a sliding scale to work out repayment of training costs so that the debt reduces over the course of the employment, recognising that both parties benefit over time from the training. When deciding whether a term is a penalty, the amount of loss the employer actually suffered (if any) is irrelevant. This is because like any other contract term, the tribunal must examine what the parties intended when they made the contract, not once it was broken (see Chapter 3).